ECB's Verbal Intervention To Keep EURUSD Below 1.4000...

ECB Draghi commented in Vienna on Thursday during the U.S. afternoon and caused an immediate EURUSD sell-off as traders were surprised at the apparent verbal intervention by the ECB Chief. Here are some of the highlights of Draghi’s comments:

(EU) ECB chief Draghi: FX rate is now becoming more relevant in assessing price stability
Real interest rate spread between Euro Zone and rest of world will probably fall putting downward pressure on exchange rate
Reiterates ECB will counter any material risk to inflation expectations
The longer inflation remains low, the higher the probability is that deflation risks will emerge; ECB has been preparing non standard measures to protect against deflation
Stronger Euro in recent years has had a major impact on inflation. inflation is expected to move towards 2% as economy recovers
Reiterates inflation will converge with ECB target over the medium term

One interesting point to be made is the fact that Draghi tackled the subject of deflation head on, and admitted that the potential of deflation risk remains as long as inflation were to remain low, and that ECB has been preparing non-standard measures to protect against deflation, or in other words, ECB could introduce stimulus, negative deposit rates, or other measures that are essentially more easing policies for the Euro. This is obviously on a complete opposite spectrum when compared to the ECB Rate Decision Press Conference back in March 6, where Draghi was not only more upbeat, but his focus was squaredly on inflation returning to the target range on its own, implying a low probability for further non-standard measures to be implemented.

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Furthermore, although Draghi stated that “Euro exchange rate was important for growth and inflation, but ECB had no FX policy target,” his recent comments obviously is adding more importance to exchange rates, and the fact that price stability, or the main mandate of the ECB, could be affected as market reacts to the chaos in risk sentiments. Draghi also stated that “forex developments muted inflation by 0.4-0.5% since 2012. Rule of thumb stated 10% change in exchange rate effected inflation by 0.4-0.5%”, or in essence, a strong exchange rate in the Euro will hinder inflation, which could conceivably delay recovery, a sentiment that was echoes by ECB Noyer (France), who said that “stronger Euro currency created downward pressure on economy and inflation; Downward pressure from FX rate was not warranted”…

In conclusion, with ECB Draghi having put his foot down on FX rates as EURUSD approaches the psychological 1.4000 level, it’s going to represent a strong resistance for the pair, at least for the time being; and considering that if there aren’t any more news catalysts adding momentum to the EURUSD, this could be the top as market re-evaluate their positions on the Euro.

Thanks,

henry-sig